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Unit 2 Test Review
Savings, Investment and the Financial System
1. What is a financial intermediary? Explain how each of the following fulfills that role:
a. Mutual fund
b. Bank
c. Pension fund
d. Life insurance company
2.
What is a financial asset? Explain how each of the following fulfills that role:
a. Loan
b. Bond
c. Stock
d. Checkable Bank Deposit
What three main functions do they serve?
3.
What is liquidity? What does the term “liquid asset” mean?
4.
If you choose to purchase a stock, you are likely to receive a(n) (higher, lower, equivalent) return in exchange for a(n)
(higher, lower, equivalent) risk.
If you choose to purchase a bond, you are likely to receive a(n) (higher, lower, equivalent) return in exchange for a(n)
(higher, lower, equivalent) risk.
5.
What is the Savings-Investment Spending Identity?
6.
Define the term budget balance. What is the difference between a budget surplus and a budget deficit? Budget Balance =
______________________ - _________________________.
7.
Define the term national savings. National Savings = ______________________ + ________________________.
8.
Define the term private savings. Private Savings = _______________________ - _________________________.
9.
Define the term capital inflow. Capital Inflow = ________________________ - ___________________________.
10. In a closed economy (S = I), suppose that GDP is $20 trillion. Consumption is $10 trillion and government spending is $5
trillion. Taxes are $1.5 trillion. What is the value of each of the following:
a. Government budget balance
b. National savings
c. Private savings
d. Investment spending
Now assume it is an open economy (S=I), where exports are $1trillion and imports are $3 trillion. How much is the net
capital inflow?
Money Measurement
11. What is included in the M1 definition of money? What is included in M2? M3?
12. Indicate whether each of the following is part of M1, M2, M3, or neither:
a. $95 on your campus meal card
b. $0.55 in the change cup in your car
c. $1,663 in your savings account
d. $459 in your checking account
e. $27.50 check from your friend
f. $150,000 in a time deposit
g. 50 shares of stock worth $2,000
h. A $1,000 line of credit on your Amazon credit card
13. Explain the monetary equation of exchange (MV=PQ). Given this equation, graph the results of expansionary monetary
policy.
14. What are the three main functions/roles of money? Indicate the correct role for each scenario:
a. Using money to purchase a new MP3 player
b. Buying the latest Blue-Ray disc movie with a $20 bill
c. Keeping part of your wealth in a savings account
d. Discovering money in your coat that you placed there last winter
e. Putting a price on a meal
f. Buying a ticket to a rodeo
Banking and Money Creation
15. Why is there a money multiplier and what is its formula? Why in reality is it smaller than in theory?
16. Suppose the reserve requirement is 15% and you deposit a $5,000 bonus you just received in your checking account.
How much of the deposit is the bank required to keep in reserves?
How much can the bank loan out?
What is the possible maximum expansion in the money supply?
17. What will happen to the money supply under the following circumstances in a checkable-deposit-only system? What is the
multiplier in each scenario? (Assume the banking system does NOT hold excess reserves.)
a. The required reserve is 25% and a depositor withdraws $700 from his checking account.
b. The required reserve is 5% and a depositor withdraws $700 from his checking account.
c. The required reserve ratio is 20% and a customer deposits $750 to her checking account.
d. The required reserve ratio is 10% and a customer deposits $600 to her checking account.
18. A commercial bank holds $700,000 in demand deposits and $100,000 in reserves. If the required reserve ratio is 10%, what
is the maximum amount by which this bank may increase its loans? What is the maximum amount by which the banking
system may increase loans as a result?
19. What is the difference between the money supply and the monetary base? Which is a component of both? (Draw the Venn
diagram to help!)
20. When the required reserve ratio is lowered, the potential for money creation (increases/decreases). When the required
reserve ratio is raised, the potential for money creation (increases/decreases).
21. Where can a bank choose to store its reserves?